Yen back to normal levels that caused intervention

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Yen back to normal levels that caused intervention

The yen is back to normal levels that caused market intervention last month, as traders test the tolerance of authorities for a depreciating currency.

The Japanese currency was trading Friday at 145.14 per dollar and was poised for an eighth week in a row of declines. It hit 145.90 per dollar on September 22, triggering intervention from Japan that led to a near-4% intraday rally in the yen.

The Bank of Japan continues to hold its accommodative monetary policy stance while peers like the Federal Reserve hike and ramp up hawkish rhetoric. An extended period of yen weakness beyond 145 could cause speculation that the ministry will tolerate a gradual decline in the currency, especially since Japan's foreign-exchange reserves have fallen.

Adam Cole, chief currency strategist at RBC Europe in London, wrote in a research note that while the MOF wants to avoid a sustained break through 145 for now, the significance of this level will diminish fairly quickly. The intervention model of the RBC is consistent with evidence that the MOF is more sensitive to the rate of change than the level of exchange rate. The release of the US labor market data for September was a key catalyst for the financial market direction, as traders were prepared for more volatility Friday. The possibility of outsized price swings is further raised by the fact that Monday will be a holiday in both the US and Japan, which will affect the probability of outsized price swings.

If the US jobs data cements speculation of a 75 basis point Fed rate hike, the yen could reach the upper half of 145 levels, said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. No matter how much the finance ministry spends, an intervention can not stop the weakness of the yen, but can only cause a temporary shock yen rally. Japan's foreign-exchange reserves fell to $1.24 trillion at the end of September from $1.29 trillion a month earlier in the month, with holdings of foreign securities down by $55 billion, according to the Ministry of Finance.

Finance Minister Shunichi Suzuki told reporters in Tokyo that the fall in Japan's foreign reserves in September was the largest on record. There are reasons behind the decline, including a decrease in securities value, as well as Japan selling foreign currencies for intervention. Suzuki reiterated on October 3 that the nation will take action against excessive one-sided moves in the foreign-exchange market if necessary. The Ministry of Finance said last week that it spent 2.84 trillion yen $19.6 billion in September to limit the yen's losses.